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India’s Construction Conundrum: Restarting Activity Post-Lockdown

12 MIN READ•May 19, 2020

Construction has come to a halt due to the Great Lockdown, and India is feeling its repercussions. Although some countries decided to brand it as an essential activity, like the US, most also halted activity. According to a recent survey, nearly 59,000 lakhs crore worth of construction was put on hold amidst the COVID-19 pandemic in India. Now that lockdowns are being eased, countries such as China, Spain, Germany and Israel have focused on construction reactivation as a way to kickstart their economies. Especially since the construction industry provides a multiplier effect and the real estate and construction industries together make up for approximately 14-15 percent of India’s GDP.

In the latest GRI Club RE India eMeeting, leaders gathered to discuss the impact the pandemic has had on construction, supply chains and its workforce. There has been a mixed reaction throughout the states in India regarding the reactivation of the construction sector. Haryana for instance has been quite proactive as some of its cities have begun operations. The real challenge is in larger cities such as Mumbai, Chennai and Kolkata. Bangalore has allowed for construction to commence again, but only with 30 percent of their capacity.

Migrant Workers: India’s Main Challenge

India’s construction workforce is made up of about 15 million workers and it faces a unique predicament as most of these workers are migrants from all over the country. The Indian government has encouraged all developers and contractors to look after their human capital and provide them their full salaries, as well as proper roof, food and access to medications throughout the entire duration of the lockdown.

A lingering concern for developers is whether or not there will be enough workers when sites restart operations. The reasoning behind this is that many workers believe that this pandemic is a city problem, not a village problem, making them hesitant to return to the big cities where the construction sites are. The workers that are currently at the worksites prefer to go back to their hometowns once the lockdown is lifted, and would not return until after the harvest and festive seasons in October or November. This concern regarding migrant workers will be a reality for the next three to six months. Once all workers return to the worksites, other challenges will emerge as contractors will have to create adequate accommodations for workers that adhere to social distancing measures.

Inflated and Disrupted Supply Chains

India’s construction supply chains have also been impacted by the halt of activities. Cement cartelisation has inflated prices in Bangalore which does not align with the production decrease or absorption in the last quarter of 25 percent. While steel prices have not been volatile due to an absence of cartels in the industry, as well as the fact that steel has a cheaper price base. This has generated an opportunity in the industry to develop more buildings using steel. Other materials or parts of materials sourced from China, such as fit-outs and high-end finishes, are likely to go up in price, creating a pain-point in cost estimates.

It seems everything including the cost of capital has just gone up countering with the decrease of the end-users’ purchasing power. Although some prices are volatile at the moment, one of the biggest concerns felt by the industry participants is not cost reduction, but on means of attaining financing either through sales or borrowings from lenders. This concern would be controlled with the developers having a good track record and high asset quality.

The Industry Requires More Government Intervention

Various senior officers in the government ranks have repeatedly mentioned the need to use the construction industry to kickstart the economy due to its multiplier effect, and it helps a vast amount of the country’s population as real estate and construction are the second largest employers in India.

A couple of weeks ago, approximately 25,000 crores were injected into the NHA system, nevertheless no direct relief package or stimulus has been given to the real estate industry yet. The cartelisation of materials is an issue that has been raised to the government by NAREDCO as it has resulted in the cost of RMC being increased as cement prices rise and due to the labor shortage. The government must play an active role in generating worker confidence to come back to work.

The third lockdown generated great panic among citizens and with the nation moving into the fourth stage of lockdown, it calls for some serious action by the government. Members suggest that the government should shed more light on how it is preparing itself to manage the virus and the precautions it has implemented. The virus is here to stay and the world will have to learn to live with it. Developers and contractors are looking for new ways to bring workers back from their hometowns, but no concrete support has been provided by the government yet.

The developers are also keen to have the support from the government to help defer the cash flows to some extent, including relaxations on GST being levied at the time of actual sale rather than during the construction phase. Overall, members feel that the intent from the government is there, but it being translated into real action is yet to be seen.

Technology’s New Role in Construction

In the background of the current state of affairs, the developers are likely to revisit the drawing board and re-engineer the course of action. According to some of the industry participants the only way to succeed is by employing technology into the construction industry. Construction is one such industry that is lagging behind on the technological development front, creating greater dependencies in labor and increasing uncertainty when it could be curtailed with technology.

Construction industry bears various inefficiencies starting from design ranging to both material and labor utilization inefficiencies. The current scenario will pave the way for the use of technology to address areas of opportunities in projects. Members believe that there will be an increase in the use of prefab, pre-cast, volumetric construction, modular homes and dough-cut technologies to increase productivity and build faster. The concern regarding prefab is the premium to be paid for this facility. Paying the premium is not a problem in case there is an absorption velocity to match the outflow, otherwise it is moot.

Instead it would pay out well to focus on having a better understanding of the material to work power logistics or even look at a mixed solution, integrating prefab for certain construction elements instead of using it to replace the entire construction process, such as the construction of toilets in residential projects. Another concern regarding prefab is its capabilities in terms of capacity and quality.

Yet the foreseeable shortage in labor forces due to the monsoon and festive seasons will prive ample time to experiment with different technologies. The automation of the construction industry however poses a moral dilemma, once the industry integrates technology the question that arises would be to seek an agenda to keep the people employed busy by creating different jobs, so people are not idle. Most industry participants attest to the scenario that technology is going to play a big role going forward especially after COVID-19. However, some caution will be maintained as developers cannot afford to increase costs that are associated with integrating new technology.

Innovative Designs for a Post-Lockdown City

There are initiatives toward improving the air circulation system’s filters as the conduit of COVID-19 and such other viruses is air. In the commercial properties, there is a need to reexamine duct systems. The ducting that is alongside the floor is going to be banned as it blows up anything that is there on the floor alongside the dust particles. These new costs are likely to go up marginally in the existing projects, but not to an extent that would shake the needle. On the other hand, integrating these changes into new buildings will heavily impact design costs. Other questions are arising such as how social distancing would be applied to lobbies and elevators, and industry players are working together to create innovative measures.

Price and Expectation Gaps Among Tenants

On the demand front, corporate customers have requested for rent waivers and deferments right after the RBI announcement. However, the force majeure clauses in these agreements envision a scenario where the building is considered not fit for occupation, resolution for which is provided by termination of agreement and not by way of rent waiver. A genuine concern faced at the time of the global financial crisis was corporates not doing well, the conversations had then involved escalating prices but not on reducing the prices. The chances of price reductions, even in the current scenario, does not seem likely.

As for the residential market, the developers are likely to reduce the prices by 10-15 percent, providing subventions and installment deferrals as a way to create interest. In terms of the supply and demand shortfall, it is likely to match as there will be a delay in new supply coming out which will match the demand shortfall. The uncertainty existing on customers front, extends to the uncertainty in the outlook for the next 12 months as well.